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The Economy

Last week had a relatively light schedule of economic reports, but nearly every report painted a more optimistic picture for the second half of the year. One clear sign that the economy continued to gain momentum was the recently released data on the trade balance. The U.S. trade deficit narrowed 5.5 percent to $44.0 billion in September. Exports rose 0.3 percent on the month, which is its highest level since August 2008 and imports fell 1.0 percent. Although much of the improvement in exports stemmed from a weaker dollar and aircraft orders, we think the trend is likely sustainable. With the second dose of quantitative easing we anticipate further downward pressure on the dollar, which should continue to lend support to exports in coming quarters.

Speaking of the trade outlook, the Bureau of Economic Analysis (BEA) assumed that the trade deficit would narrow only modestly in September when it made its initial estimate of third-quarter GDP growth. However, the actual outturn surpassed the BEA’s pessimistic projection. As a result, the third-quarter GDP growth figure, which was originally reported as an annualized rate of 2.0 percent, could be revised up by roughly 0.2 percentage points if all other components of real GDP stay the same. We expect trade to support economic growth through the first half of 2011. Labor market indicators for the week were also positive. Weekly first-time unemployment claims fell by 24,000 to 435,000 in the week ending November 6, the second lowest level this year. The four-week moving average, which is our preferred way of looking at this volatile series, fell to 446,500 which is the lowest level since the wake of the Lehman bankruptcy.